JPMorgan's Outlook on US Stocks and Election Scenarios
JPMorgan views a "Red Sweep" scenario in the US election as the most positive outcome for US stocks heading into the year-end, according to a recent note by the Wall Street giant.
Positive Market Impact
According to the firm, this election outcome would likely lead to a broadening equity leadership and shift market dynamics due to anticipated pro-growth policies, including deregulation and tax cuts.
“A Red Sweep scenario, which we view as the most positive for risk into year-end on prospects of pro-growth policies and deregulation across industries, as the upside potential is priced in first,” said strategists led by Dubravko Lakos-Bujas in a note.
Alleviating Uncertainty
They believe that a Republican victory would alleviate market uncertainty, allowing capital flow to resume as volatility subsides. A Red Sweep might encourage a rotation into domestic sectors,
This would permit investors to refocus on the Federal Reserve’s policy-easing efforts, especially as the economy and corporate earnings remain robust.
Complex Timing
However, JPMorgan cautions investors about possible turbulence in bond and foreign exchange markets, which might react more sensitively than in previous years.
Treasury Yields and Dollar Gains
The bank's rates team expects that in a Republican win, Treasury yields may rise, with the 10-year yield forecasted to increase by 30-40 basis points, while the US dollar could gain about 7%.
Potential Leadership Rotation
On the downside, the firm warns that such a scenario could trigger a temporary but violent rotation in leadership that may impact momentum stocks.
Strategists highlight that the “crowding in the Momentum factor” recently reached the 99th percentile, suggesting a significant risk of sharp sectoral shifts, particularly if high-momentum stocks experience a downturn.
Scenarios at a Glance
Meanwhile, a divided government outcome would likely be neutral to slightly positive for US equities, according to JPMorgan.
In contrast, a Democratic sweep would likely weigh on market sentiment, with the firm noting that “a Blue Sweep scenario would likely be negative for the market,” although they consider this outcome low-probability.
Broader Market Trends
Amidst a generally positive outlook for equities heading into year-end, Lakos-Bujas and his team express concern over a sharper increase in the back-end of the rates curve, implying the Fed may be constrained.
US equity markets are nearing record highs this election year, with the S&P 500 achieving a recent 3-month return of 12.5%, the strongest in nearly a century, and a year-to-date return of 22%, the third-highest since 1936.
While elections significantly influence areas like the economy and healthcare, history indicates that markets generally perform positively during presidential terms, with few exceptions like the Bush and Nixon eras.
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